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Jagaran Publications Vs. Inspecting Assistant - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Allahabad
Decided On
Judge
Reported in(1983)4ITD371(All.)
AppellantJagaran Publications
Respondentinspecting Assistant
Excerpt:
.....to whom the salaries were paid, were kartas of their respective huf ; they were partners of the assessee-firm in their representative capacities, that is, on behalf ,of the t respective huf, who were the partners of the assessee-firm, while salaries paid to them were for services rendered by them in their personal capacities and not on behalf of the huf whom they represented as partners of the assessee-firm. the iac (assessment), however, held that since these persons were partners of the assessee-firm even according to the instrument of partnership, whether they were partners in individual capacity or they represented the huf of which they were the kartas was an immaterial consideration and, therefore, the provisions of section 40(6) of the income-tax act, 1961 ('the act') were.....
Judgment:
1. These two appeals, one relating to the assessment year 1975-76 and another relating to the assessment year 1976-77, filed by the assessee against the orders of the Commissioner (Appeals), deal with common issues and are, therefore, for the sake of convenience disposed of by a consolidated order.

2. The assessee is a registered-firm. Amongst the expenses, deduction of which was claimed in working out the business income, was salaries to Shri P.C. Gupta, Shri N.M. Gupta, Shri Y.M. Gupta, Shri M.M. Gupta, and Shri Dhirendra Mohan Gupta, the aggregate of which amounted to Rs. 1,71,300 for the assessment year 1975-76 and Rs. 1,42,800 for the assessment year 1976-77. It was claimed before the I AC (Assessment) that all the five persons to whom the salaries were paid, were kartas of their respective HUF ; they were partners of the assessee-firm in their representative capacities, that is, on behalf ,of the t respective HUF, who were the partners of the assessee-firm, while salaries paid to them were for services rendered by them in their personal capacities and not on behalf of the HUF whom they represented as partners of the assessee-firm. The IAC (Assessment), however, held that since these persons were partners of the assessee-firm even according to the instrument of partnership, whether they were partners in individual capacity or they represented the HUF of which they were the kartas was an immaterial consideration and, therefore, the provisions of Section 40(6) of the Income-tax Act, 1961 ('the Act') were applicable. The IAC (Assessment), therefore, disallowed the claim of deduction of these salary payments and added them back while working out the assessee's business income. When the matter went up in appeal, the Commissioner (Appeals) agreed with the IAC (Assessment) on this issue and refused to interfere. The assessee has, therefore, come up with the main common point of dispute in the present appeals before us.

3. The assessee's learned counsel, Shri Sharma at the outset pointed out that even though for the earlier assessment years the Tribunal had upheld the disallowance of these salary payments, the orders of the Tribunal for the earlier years were no more applicable in view of the change in the instrument of partnership which governed the earlier years and the instrument of partnership which governed the assessment years under appeal before us. Elaborating on his arguments, he took us through clause 5 of the instrument of partnership dated 12-8-1969 (the partnership deed), which governed the earlier assessment years and which reads as under : 5. The partners of the firm shall be entitled to the following salaries, before the profit or loss of the firm is shared as mentioned in clause 4 thereof: and compared it with clause 6 of the instrument of partnership dated '3-8-1972 (the new partnership deed), which governed the assessment years under appeal before us and which reads as follows : 6. The partners will not be remunerated for their services rendered to the firm in their capacity as partners, but if any partner renders any service for which he is equipped with the necessary skill and experience which the firm will have to buy from the market, he may be remunerated for such services only in his personal/individual capacity.

Shri Sharma pointed out that while in the old partnership deed, which governed the earlier assessment years, the partners of the firm were to be entitled to the salaries, in the instrument of partnership dated 3-8-1972, that is, the new partnership deed, which governed the assessment years under appeal before us, it was specifically mentioned that the partners will not be remunerated for their services rendered to the firm in their capacity as partners and if any partner rendered any service for which he was equipped with the necessary skill and experience which the firm will have to buy from the market, he may be remunerated for such services only in his personal/individual capacity.

He, therefore, submitted that the orders of the Tribunal for the earlier years, which proceeded on a reading of the relevant clause 5 of the old partnership deed governing those assessment years, will no more be applicable for the two assessment years under appeal before us now.

He also referred to the preamble of the new partnership deed wherein it had been specifically mentioned that the business carried on by all the partners was inherited by them on partial partition of their respective HUF businesses which before the assessment year 1958-59 were being carried on by their HUF and it was necessary to remove the misunderstanding that their share of profits from the firm was not their individual property but belonged to their HUF. Our attention was also invited to the service agreements dated 1-7-1972, entered into by the assessee-firm and these five persons wherein also it had been clearly laid down that while the partner of the assessee-firm was the HUF, the service agreement is entered into by the assessee-firm on the one hand and the person concerned in his personal/individual capacity.

Reference in this connection was made by Shri Sharma to the ruling of the Full Bench of the Hon'ble High Court in the case of CIT v. Ram Laxman Sugar Mills [1973] 90 ITR 73, wherein their Lordships by majority judgment held that since the payment had not been made with mutual consent or in pursuance of the contract of partnership, the remuneration paid to the partners who were members of the Board of Management, appointed by the Central Government, which had taken over that firm under the Essential Supplies (Temporary Powers) Act, 1946, was an admissible deduction in spite of the provisions of Section 40(6). He also submitted that the ruling of the Hon'ble Supreme Court in the case of CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292 was under the 1922 Act and, therefore, will not be applicable here. Summing up, Shri Sharma vehemently argued before us that the claim of deduction of salary to S/Shri P.C. Gupta, N.M. Gupta, Y.M. Gupta, M.M. Gupta and D.M. Gupta was admissible and was wrongly not allowed by the revenue authorities.

4. On the other hand, the learned departmental representative, Shri Upadhyay, submitted to us that the judgment of the Hon' ble Supreme Court in the case of R.M. Chidambaram Pillai (supra) even though under the 1922 Act, was equally applicable under the 1961 Act. Proceeding further, Shri Upadhyay cited before us two more rulings, one of the Hon' ble High Court of Delhi in the case of Sanghi Motors v. CIT [1982] 135 ITR 359, wherein, their Lordships laid down that where a payment was made to a partner of the firm, the capacity in which he received the payment was an immaterial consideration and the provisions of Section 40(6) were attracted, and of the Hon' ble High Court of Madhya Pradesh in the case of Jalam Chand Mangilal (No. 2) v. CIT [1982] 138 ITR 347, wherein, also their Lordships laid down that irrespective of the capacity in which a person became a partner of a firm, Section 40(b) is a bar to the payment of interest to him and, therefore, irrespective of whether the person was a partner in his individual capacity or as a karta of his HUF, the provisions of Section 40(6) will be applicable to payments made to him. Passing reference was also made by Shri Upadhyay to the ruling of the Hon' ble High Court of Allahabad in the case of CIT v. London Machinery Co. [1979] 117 ITR 111, wherein, their Lordships laid down that whether a person joins a firm representing his HUF as its karta or in his personal capacity, the payment made to him attracts the provisions of Section 40(6). Reverting to the ruling of the Hon'ble Supreme Court in the case of R.M.Chidambaram Pillai (supra), Shri Upadhyay submitted that a firm is not a legal person even though it has some attributes of personality and since a contract of employment requires two distinct persons, that is, employer and the employee, there cannot be a contract of service between a firm and one of its partners. He, therefore, vehemently argued before us that the so-called service agreement between the assessee on the one hand and the five persons, who were partners of the assessee-firm, meant nothing and the payment of the salary by the assessee to them represented a special share of the profits as laid down by their Lordships of the Hon'ble Supreme Court in the case of R.M. Chidambaram Pillai (supra) etc. Summing up, Shri Upadhyay vehemently argued before us that since even according to the instrument of partnership governing the two assessment years under appeal before us, the five persons to whom salary payments were made, were partners of the assessee firm, the payments were hit by the provisions of Section 40(6) and were rightly not allowed as a deduction by the revenue authorities.

5. We have carefully considered the rival submissions. At the outset, it would be necessary to point out that in the case of Ram Laxman Sugar Mills (supra), decided by the Full Bench of the Hon'ble High Court of Allahabad, the assessee-firm was taken over by the Central Government under the Essential Supplies (Temporary Powers) Act, 1946, a Board of Management was set up by the Government and the four persons who were appointed on the management board happened to be the partners of that firm and it was in these circumstances that the majority judgment of the Hon'ble High Court of Allahabad held that since payment to these four persons had been made neither with the mutual consent of the partners nor in pursuance of the contract of partnership, the payments were not hit by the provisions of Section 10(4)(b) of the 1922 Act, (corresponding to Section 40(b) of the 1961 Act, under consideration here) and the claim of deduction of these payments in working out the business income was admissible. The ruling of the Hon'ble Allahabad High Court in this case, will, therefore, not be applicable to the facts of the present case which are very different. There is no difference in the provisions of Section 10(4)(b) of the 1922 Act and the corresponding Section 40(b) of the 1961 Act. We cannot, therefore, agree with the assessee's learned counsel, Shri Sharma, that the ruling of the Hon'ble Supreme Court in the case of R-.M. Chidambaram Pillai {supra) was under the 1922 Act and will, therefore, not be applicable here. It might perhaps not be out of place to mention here that the Hon'ble Delhi High Court in the case of Sanghi Motors {supra) and Hon'ble Madhya Pradesh High Court in the case of Jalam Chand Mangilal {supra) laid down that irrespective of the capacity in which a person becomes a partner of a firm, Section 40(6) is a bar to the payments specified therein to him. Elaborating on this aspect their Lordships of the Hon'ble Delhi High Court laid down that it is an immaterial consideration whether a person is a partner in his own right or represents somebody else, e.g., as the guardian of a minor or as a trustee of a trust or as a principal partner representing another sub-partnership. The Hon'ble High Court of Allahabad in the case of London Machinery Co. {supra), also laid down that when a person in his capacity as karta of his HUF enters into a partnership with others, he is a partner only in his personal capacity. Their Lordships further laid down that it was well settled that even where a partnership deed states that a particular person is a partner as representing his HUF, the legal implication is that the person is a partner personally and the other family members are not. The Hon'ble Supreme Court in the case of R.M. Chidambaram Pillai {supra) laid down that the firm, even though having some attributes of personality, is not a legal person and since a contract of employment requires two distinct persons, namely, the employer and the employee, there cannot be a contract of service in strict law between a firm and one of its partners. Their Lordships further laid down that the payment of salary to a partner represents a special share of profits. Considering all this, we have no hesitation in coming to the conclusion that the capacity in which the five persons under consideration here, namely, S/Shri P.C. Gupta, N.M. Gupta, M.M.Gupta, and D.M. Gupta, were partnersand whether in respect of the share of profits they were the beneficial owners or the HUF of which they were the kartas were the beneficial owners, are all immaterial considerations and they were partners of the assessee-firm in their personal capacity. It automatically follows, therefore, that the salary payments made to them are hit by the provisions of Section 40(b). The claim of deduction of these salary payments, therefore, in our view, was not admissible and was rightly not allowed by the revenue authorities. On this issue, therefore, no interference appears called for.

6. The next grievance, common to both the appeals, is against the disallowance out of car expenses for estimated use of the cars by the partners for their personal purposes. The car expenses, claimed by the assessee-firm, amounted to Rs. 50,544 for the assessment year 1975-76.

and Rs. 57,264 for the assessment year 1976-77. The IAC (Assessment) found that out of these car expenses, Rs. 7,154 were estimated by the assessee as relating to the personal use of the cars by the partners which was added back for the assessment year 1975-76. However, for the assessment year 1976-77, no such expenses were estimated for the personal use of the cars by the partners and the entire expenses were claimed to be for business purposes. The IAC (Assessment), therefore, considering the past record, held that Rs. 17,500 out of the car expenses were attributable to the use of the cars of the firm by the partners for their personal purposes. Since for the assessment year 1975-76 the assessee had himself added back a sum of Rs. 7,154 out of the car expenses, the difference of Rs. 10,346 (Rs. 17,500 minus Rs. 7,154) was further disallowed and added back. For the assessment year 1976-77, out of the total car expenses claimed at Rs. 57,265, Rs. 17,500 were estimated for personal use of the cars by the partners which was disallowed and added back. These additions were confirmed in appeal by the Commissioner (Appeals). The assessee has, therefore, come up with the next common point of dispute in the present appeals before us.

7. The assessee's learned counsel, Shri Sharma, submitted to us that one of the partners had a personal car of his own, the expenses of which were not debited in the account books of the firm and in these circumstances there was no justification for any disallowance out of the car expenses on the ground of personal use of the cars by the partners for their personal purposes. Alternatively, it was argued that the disallowance was excessive and should be reduced.

8. On the other hand, the learned departmental representative, Shri Upadhyay, submitted to us that even if one of the partners had his personal car, the expenses of which were not debited in the account books of the firm, the fact remains that there were six other partners who must have been using the cars of the firm for their personal purposes In these circumstances, according to Shri Upadhyay the disallowance out of car expenses, as made by the IAC (Assessment), was justified and was rightly upheld by the Commissioner (Appeals).

9. We have carefully considered the rival submissions. We agree with the learned departmental representative, Shri Upadhyay that even if one partner had his own car, the expenses of which were not debited in the account books of the firm, it was obvious that the other six partners must have been using the cars of the firm for their personal purposes and, therefore, disallowance out of the car expenses for estimated personal use of the partners will be justified. However, considering the totality of the facts and circumstances, we are of the opinion that the disallowance appears to be slightly excessive. The car expenses attributable to the personal use of the cars by the partners are, therefore, estimated at one-fourth of the expenses. This means that for the assessment year 1975-76, the disallowance and add back will be one-fourth of the expenses claimed less what was added back by the assessee-firm itself while for the assessment year 1976-77, the entire one-fourth of the car expenses claimed will be disallowed and added back.

10. The next grievance, relating to the assessment year 1975-76, is against the action of the Commissioner (Appeals) in setting aside the assessment and sending the matter back to the IAC (Assessment) on the issue of whether the entire interest, which was claimed as a deduction under Section 36(1)07/) of the Act, in working out the business income was admissible in view of the debit balances appearing in the accounts of the partners on which no interest was charged. The assessee's learned counsel, Shri Sharma pointed out that the entire interest, which was claimed as a deduction in working out the business income for the assessment year 1975-76 under Section 36(1)(iii) was allowed by the IAC (Assessment), this did not form the subject-matter of appeal before the Commissioner (Appeals) and this issue did not figure even in the grounds of appeal before the Commissioner (Appeals). He, therefore, submitted that the Commissioner (Appeals) had no justification to travel beyond the grounds of appeal, that is, in other words, the subject-matter of appeal before him to adjudicate upon an issue which was never the subject-matter of any controversy between the assessee and the IAC (Assessment). Shri Sharma, therefore, vehemently argued before us that on the issue of whether the interest deduction of which was claimed under Section 36(1)(iii) was admissible, the Commissioner (Appeals) wrongly set aside the assessment.

11. On the other hand, the learned departmental representative, Shri Upadhyay submitted to us, relying on the authorities of the Hon'ble Supreme Court in the case of CIT v. McMillan & Co. [1958] 33 ITR 182, CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 and CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443, that the AAC has been constituted a revising authority against the decisions of the ITO, a revising authority not in the narrow sense of revising what is the subject-matter of the appeal, not in the sense of revising those matters about which the assessee makes a grievance to a revising authority, but in the sense that once the appeal is before him he can revise not only the ultimate computation arrived at by the ITO, he can revise every process which led to the ultimate computation of assessment the only limitation on these powers being that he cannot in doing so bring to tax a new item or a new source of income which was not disclosed by the assessee in the return or assessed by the ITO in the assessment order. Proceeding further, Shri Upadhyay submitted that the issue before the IAC (Assessment) as well as before the Commissioner (Appeals) was, what was the income liable to assessment from business and in the computation of income from business one of the matters to be considered was whether the interest on borrowed capital was rightly allowed as a deduction in working out the business income.

He, therefore, submitted that the Commissioner was within his jurisdiction in setting aside the assessment and sending the matter back to the IAC (Assessment) on the issue of whether the interest on borrowings, which was claimed as a deduction, was admissible or not and if so, to what extent.

12. We have carefully considered the rival submissions. In view of the ruling cited by the learned departmental representative, it is not open to dispute that once an assessment comes before the first appellate authority, that is, either the AAC or the Commissioner (Appeals), as the case may be, his competence is not restricted to examining those aspects of the assessment which are complained of, his competence ranges over the entire assessment and it is open to him to correct the ITO or the IAC (Assessment), as the case may be, not only with regard to a matter raised and complained of by the assessee in the grounds of appeal but also with regard to a matter which was considered by the ITO and determined in the course of the assessment, the only limitation on this power of the first appellate authority being that in doing so, he cannot bring to tax an item or a source of income which was not disclosed by the assessee in the return or subjected to assessment in the assessment order. Viewed in this context, the issue before the Commissioner (Appeals) was the computation of business income which was disclosed by the assessee in return and was the subject-matter of assessment by the IAC (Assessment). In the computation of income from this business, which was also the subject-matter of appeal before the the Commissioner (Appeals), it cannot be disputed that the issue of whether the interest on borrowed capital was wholly and exclusively for business purposes and was, therefore, admissible was also a relevant matter. This matter could, therefore, have been gone into by the Commissioner (Appeals) when the issue of computation of income from business came up before him. The Commissioner (Appeals), while setting aside the assessment and sending the matter back to the IAC (Assessment) on this issue, has directed that while deciding the matter afresh on this issue, the assessee should be given an opportunity of being heard. It might also perhaps not be out of place to mention here that for the assessment year 1974-75, that is, for the immediately preceding assessment year, the matter has been sent back to the ITO on this issue for a decision afresh and even for the subsequent assessment year, that is, 1976-77, the matter has been sent back to the IAC (Assessment) for fresh consideration. Considering all this, we have no hesitation in coming to the conclusion that the Commissioner (Appeals) rightly set aside the assessment and sent the matter back to the IAC (Assessment) on the issue of allowability of interest under Section 36(1)(iii). On this issue, therefore, no interference appears called for.

13. The next grievance again relates only to the assessment year 1975-76 and is against the disallowance out of the travelling expenses which were claimed at Rs. 86,868. The assessee itself had disallowed and added back Rs. 5,000 out of these travelling expenses for estimated inadmissible expenses. The IAC (Assessment), however, considering the details of the expenses claimed, held that the estimate of Rs. 5,000 for expenses of inadmissible nature under this head was on the low side. He, therefore, raised the disallowance out of the travelling expenses from Rs. 5,000 added back by the assessee itself to Rs. 7,000.

The Commissioner (Appeals) upheld the action of the IAC (Assessment) on this issue and refused to interfere. The assessee has, therefore, come up with the next point of dispute relating only to the assessment year 1975-76.

14. The assessee's learned counsel, Shri Sharma submitted to us that the assessee's estimate of expenses of inadmissible nature under the head 'travelling expenses' was fair and reasonable and the revenue authorities were not justified in raising this estimate from Rs. 5,000 to Rs. 7,000.

15. On the other hand, the learned departmental representative, Shri Upadhyay submitted to us that even the disallowance of Rs. 5,000 by the assessee itself was on estimate and, therefore, if the assessee's estimate was not accepted and instead the IAC (Assessment) made his own estimate which was confirmed in appeal by the Commissioner (Appeals), no interference on this issue appears called for.

16. We have carefully considered the rival submissions. After all what was done by the assessee in adding back Rs. 5,000 out of travelling expenses for expenses of inadmissible nature was on estimate only. In these circumstances, if the revenue authorities did not accept this estimate and instead estimated the expenses of inadmissible nature under the head 'travelling expenses' at Rs. 7,000, no interference with what was done by the revenue authorities appears called for.

17. The next grievance, again relating to the assessment year 1975-76, is against the disallowance of Rs. 2,000 out of the building repairs which were held to be expenses of a capital nature and on which depreciation was allowed by the IAC (Assessment). The assessee's learned counsel, Shri Sharma submitted to us that the details of the building repairs were filed before the IAC (Assessment) and not a single item of these expenses was pointed out by the IAC (Appeals) which represented of a capital nature. In these circumstances, according to Shri Sharma, the disallowance of Rs. 2,000 out of building repairs was not justified. He further added that this disallowance cannot be justified on the ground that depreciation on this addition has been separately allowed.

18. On the other hand, the learned departmental representative, Shri Upadhyay submitted that the estimate of Rs. 2,000 out of building repairs for expenses of capital nature was perfectly justified and particularly when on this amount depreciation was also allowed by the IAC (Assessment). Alternatively, Shri Upadhyay argued that if this disallowance was to be deleted, the depreciation allowed on this disallowance should also be withdrawn.

19. We have carefully considered the rival submissions. In the absence of any specific item out of the building repair expenses, which could be said to have resulted in an asset or advantage of enduring benefit, the disallowance out of building repair expenses, in our view, does not appear to be justified and is hereby deleted. It follows, therefore, that the depreciation on this amount allowed in the assessment should also be withdrawn.

20. The other grounds of appeal, both for the assessment year 1975-76 and for the assessment year 1976-77 were not pressed before us at the time of hearing.


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